Engineering economics

For the applications of engineering science economics in the practice of civil engineering see Engineering economics Civil Engineering.

Engineering economics, before known as engineering economy, is a subset of economics concerned with the use and "...application of economic principles" in the analysis of engineering decisions. As a discipline, it is focused on the branch of economics invited as microeconomics in that it studies the behavior of individuals & firms in creating decisions regarding the allocation of limited resources. Thus, it focuses on the decision devloping process, its context & environment. it is for pragmatic by nature, integrating economic idea with engineering practice. But, it is also a simplified application of microeconomic concepts in that it assumes elements such(a) as price determination, competition and demand/supply to be fixed inputs from other sources. As a discipline though, it is closely related to others such(a) as statistics, mathematics and cost accounting. It draws upon the logical framework of economics but adds to that the analytical energy of mathematics and statistics.

Engineers seek solutions to problems, and along with the technical aspects, the economic viability of regarded and identified separately. potential a object that is caused or presents by something else is ordinarily considered from a specific viewpoint that reflects its economic value to a constituency. Fundamentally, engineering economics involves formulating, estimating, and evaluating the economic outcomes when alternatives toa defined goal are available.

In some U.S. undergraduate civil engineering curricula, engineering economics is a asked course. It is a topic on the Fundamentals of Engineering examination, and questions might also be asked on the Principles and Practice of Engineering examination; both are component of the Professional Engineering registration process.

Considering the time value of money is central to nearly engineering economic analyses. Cash flows are discounted using an interest rate, except in the most basic economic studies.

For used to refer to every one of two or more people or things problem, there are normally many possible alternatives. One option that must be considered in each analysis, and is often the choice, is the do nothing alternative. The opportunity cost of making one option over another must also be considered. There are also non-economic factors to be considered, like color, style, public image, etc.; such factors are termed attributes.

Costs as alive as revenues are considered, for each alternative, for an analysis period that is either a fixed number of years or the estimated life of the project. The salvage value is often forgotten, but is important, and is either the net defecate up or revenue for decommissioning the project.

Some other topics that may be addressed in engineering economics are inflation, uncertainty, replacements, depreciation, resource depletion, taxes, tax credits, accounting, live estimations, or capital financing. all these topics are primary skills and knowledge areas in the field of cost engineering.

Since engineering is an important factor of the manufacturing sector of the economy, engineering industrial economics is an important part of industrial or business economics. Major topics in engineering industrial economics are:

Examples of usage

Some examples of engineering economic problems range from value analysis to economic studies. Each of these is relevant in different situations, and most often used by engineers or project managers. For example, engineering economic analysis authorises a company not only established the difference between fixed and incremental costs ofoperations, but also calculates that cost, depending upon a number of variables. Further uses of engineering economics include:

Each of the preceding components of engineering economics is critical atjunctures, depending on the situation, scale, and objective of the project at hand. Critical path economy, as an example, is essential in most situations as it is the coordination and planning of material, labor, and capital movements in a specific project. The most critical of these "paths" are determined to be those that hold an case upon the outcome both in time and cost. Therefore, the critical paths must be determined and closely monitored by engineers and environments alike. Engineering economics helps provide the Gantt charts and activity-event networks to ascertain the adjustment use of time and resources.

Proper value analysis finds its roots in the need for industrial engineers and executives to not only simplify and refreshing processes and systems, but also the logical simplification of the designs of those products and systems. Though not directly related to engineering economy, value analysis is nonetheless important, and helps engineers to properly give new and existing systems/processes to form them more simple and save money and time. Further, value analysis helps combat common "roadblock excuses" that may trip up managers or engineers. Sayings such as "The client wants it this way" are retorted by questions such as; has the client been told of cheaper alternatives or methods? "If the product is changed, machines will be idle for lack of work" can be combated by; can supervision not find new and profitable uses for these machines? Questions like these are part of engineering economy, as they preface any real studies or analyses.

Linear programming is the use of mathematical methods to find optimized solutions, whether they be minimized or maximized in nature. This method uses a series of layout to create a polygon then to determine the largest, or smallest, detail on that shape. Manufacturing operations often use linear programming to assist mitigate costs and maximize profits or production.

Considering the prevalence of capital to be lent for aperiod of time, with the apprehension that it will be noted to the investor, money-time relationships analyze the costs associated with these kind of actions. Capital itself must be divided into two different categories, equity capital and debt capital. Equity capital is money already at the disposal of the business, and mainly derived from profit, and therefore is not of much concern, as it has no owners that demand its return with interest. Debt capital does indeed have owners, and they require that its usage be subject with "profit", otherwise known as interest. The interest to be paid by the multinational is going to be an expense, while the capital lenders will take interest as a profit, which may confuse the situation. To put to this, each will change the income tax position of the participants.

Interest and money time relationships come into play when the capital required to set up a project must be either borrowed or derived from reserves. To borrow brings about the impeach of interest and value created by the completion of the project. While taking capital from reserves also denies its usage on other projects that may yield more results. Interest in the simplest terms is defined by the multiplication of the principle, the units of time, and the interest rate. The complexity of interest calculations, however, becomes much higher as factors such as compounding interest or annuities come into play.

Engineers often utilize compound interest tables to determine the future or introduced value of capital. These tables can also be used to determine the effect annuities have on loans, operations, or other situations. All one needs to utilize a compound interest table is three things; the time period of the analysis, the minimum attractive rate of return MARR, and the capital value itself. The table will yield a multiplication factor to be used with the capital value, this will then give the user the proper future or presented value.

Using the compound interest tables mentioned above, an engineer or manager can quickly determine the value of capital over atime period. For example, a company wishes to borrow $5,000.00 to finance a new machine, and will need to repay that loan in 5 years at 7%. Using the table, 5 years and 7% gives the factor of 1.403, which will be multiplied by $5,000.00. This will total in $7,015.00. This is of course under the condition that the company will make a lump payment at the conclusion of the five years, not making any payments prior.

A much more relevant example is one with a certain ingredient of equipment that will yield benefit for a manufacturing operation over a certain period of time. For instance, the machine benefits the company $2,500.00 every year, and has a useful life of 8 years. The MARR is determined to be roughly 5%. The compound interest tables yield a different factor for different rank of analysis in this scenario. whether the company wishes to know the Net Present Benefit NPB of these benefits; then the factor is the P/A of 8 yrs at 5%. This is 6.463. If the company wishes to know the future worth of these benefits; then the factors is the F/A of 8 yrs at 5%; which is 9.549. The former gives a NPB of $16,157.50, while the latter gives a future value of $23,872.50.

These scenarios are extremely simple in nature, and do not reflect the reality of most industrial situations. Thus, an engineer must begin to factor in costs and benefits, then find the worth of the proposed machine, expansion, or facility.

The fact that assets and the tangible substance that goes into the makeup of a physical object in the real world eventually wear down, and thence break, is a situation that must be accounted for. Depreciation itself is defined by the decreasing of value of any assumption asset, though some exceptions do exist. Valuation can be considered the basis for depreciation in a basic sense, as any decrease in value would be based on an original value. The idea and existence of depreciation becomes particularly relevant to engineering and project management is the fact that capital equipment and assets used in operations will slowly decrease in worth, which will also coincide with an put in the likelihood of machine failure. Hence the recording and a thing that is caused or produced by something else of depreciation is important for two major reasons.

Both of these reasons, however, cannot make up for the "fleeting" nature of depreciation, which make direct analysis somewhat difficult. To further add to the issues associated with depreciation, it must be broken down into three separate types, each having intricate calculations and implications.

Calculation of depreciation also comes in a number of forms; straight line, declining balance, sum-of-the-year's, and service output. The number one method being perhaps the easiest to calculate, while the remaining have varying levels of difficulty and utility. Most situations faced by managers in regards to depreciation can be solved using any of these formulas, however, company policy or preference of individual may affect the choice of model.

The main form of depreciation used inside the U.S. is the Modified Accelerated Capital Recovery System MACRS, and it is based on a number of tables that give the a collection of things sharing a common atttributes of asset, and its life. Certain class are given certain lifespans, and these affect the value of an asset that can be depreciated each year. This does not necessarily intend that an asset must be discarded after its MACRS life is fulfilled, just that it can no longer be used for tax deductions.

Capital budgeting, in version to engineering economics, is the proper usage and utilization of capital toproject objectives. It can be fully defined by the statement; "... as the series of decisions by individuals and firms concerning how much and where resources will be obtained and expended to meet future objectives." This definition almost perfectly explains capital and its general report to engineering, though some special cases may not lend themselves to such a concise explanation. The actual acquisition of that capital has many different routes, from equity to bonds to retained profits, each having unique strengths and weakness, particularly when in relation to income taxation. Factors such as risk of capital loss, along with possible or expected returns must also be considered when capital budgeting is underway. For example, if a company has $20,000 to invest in a number of high, moderate, and low risk projects, the decision would depend upon how much risk the company is willing to take on, and if the returns offered by each category offset this perceived risk. Continuing with this example, if the high risk offered only 20% return, while the moderate offered 19% return, engineers and managers would most likelythe moderate risk project, as its return is far more favorable for its category. The high risk project failed to ad proper returns to warrant its risk status. A more difficult decision may be between a moderate risk offering 15% while a low risk offering 11% return. The decision here would be much more subject to factors such as company policy, extra usable capital, and possible investors.

"In general, the firm should estimate the project opportunities, including investment standards and prospective rates of return for each, expected to be available for the coming period. Then the available capital should be tentatively allocated to the most favorable projects. The lowest prospective rate of return within the capital available then becomes the minimum acceptable rate of return for analyses of any projects during that period."

Being one of the most important and integral operations in the engineering economic field is the minimization of cost in systems and processes. Time, resources, labor, and capital must all be minimized when placed into any system, so that revenue, product, and profit can be maximized. Hence, the general equation;

where C is total cost, a b and k are constants, and x is the variable number of units produced.

There are a great number of cost analysis formulas, each for particular situations and are warranted by the policies of the company in question, or the preferences of the engineer at hand.

Economic studies, which are much more common outside of engineering economics, are still used from time to time to determine feasibility and utility of certain projects. They do not, however, truly reflect the "common notion" of economic studies, which is fixated upon macroeconomics, something engineers have little interaction with. Therefore, the studies conducted in engineering economics are for specific companies and limited projects inside those companies. At most one may expect to find some feasibility studies done by private firms for the government or another business, but these again are in stark contrast to the overarching nature of true economic studies. Studies have a number of major steps that can be applied to almost every type of situation, those being as follows;